The Nonprofit Brand

Not as good as you think

Jonathan Ireland writes,

When someone hears the word nonprofit, they assume that such an organization is working for the public good; that it serves the homeless, protects the weak, exists for the benefit and the betterment of society at large. Hearing that something is a “nonprofit” immediately gives a sense that the organization is trustworthy and the people running it are driven by a charitable agenda. It’s a word that shuts down the critical faculties and grants an instantaneous moral stature to any organization to which it is applied. Consequently, non­profits receive a benefit of the doubt that would not be granted to any other form of private corporation.

…In some cities, upwards of a billion dollars of public funds are paid to nonprofit organizations every year with glaringly insufficient safeguards to ensure that the money is used in a manner likely to serve the public interest.

This money is then spent in ways that would shock the taxpayers whose hard-earned dollars are being effectively stolen from them. Non­profits that self-righteously declare themselves providers of homeless services actively lobby to make homelessness worse in order to increase their own funding; nonprofit organizations hire convicted felons—including murderers, gang leaders, sex offenders, and rapists—who go on to commit more felonies while receiving hundreds of thousands of dollars in government contracts; and the executives of nonprofits, the very people in charge of institutions whose stated purpose is not to make money, earn millions of dollars while catastrophically failing to deliver the public services we are paying them to provide.

Ireland hits on two themes that I have often emphasized. One theme is that non-profits take advantage of the intention heuristic. The other trope of mine is that nonprofits evade the accountability that is inherent in profit-seeking business.

Steven F. Hayward writes,

Add up all of these macro-and-micro funding sluices across the full spectrum of leftist causes and we arrive at a point where the supposedly ancillary “non-profit sector” has become a key instrument on par with the permanent bureaucracy of the administrative state, and a menace to democratic self-government.

He is drawing attention to the way that the left takes advantage of non-profit status. But my criticisms apply as much to the right-wing non-profit sector as the left-wing non-profit sector.

People assume that because non-profits do not seek profits, their intentions are good. And good intentions are sufficient to make them morally superior to profit-seeking enterprises. The intention heuristic ignores the possibility that the outcomes of profit-seeking businesses can be—and often are—more socially beneficial than the outcomes of nonprofits. We should evaluate enterprises based on outcomes, not on intentions.

Then there is the issue of accountability. A profit-seeking business is ultimately accountable to customers, who are in the best position to gauge the value of what the business provides. If customers do not pay more than the cost of what the firm provides, the firm loses money and goes out of business. In contrast, a nonprofit only has to keep its donors happy. If the services it provides are not worth the cost, it can continue to operate by maintaining good relationships between the executives of the nonprofit and the providers of funding.

The problems with nonprofits are particularly acute when the funding comes from government. Ireland writes,

you need to know something about the business model of affordable housing nonprofits. An afford­able housing NGO makes more money as rents rise in the area where its buildings are located. Government subsidies make up the difference between what the NGO’s tenants are paying and what they could be paying if the building charged them the market rate. This means that a nonprofit, despite its name, has the same profit incentive as any other landlord, in that a lack of housing construction increases its profit margins by driving up rents. The only difference is that a nonprofit benefits from high rents through government subsidies instead of from directly charging its tenants.

And that is an obvious conflict of interest. Nonprofit housing providers benefit financially if less housing gets built because high rents increase their subsidies. Affordable housing nonprofits are therefore incentivized to work against housing affordability if they want to increase the amount their executives get paid.

Ireland points out that the links between nonprofits and government are strongest in “progressive” cities. Ironically,

In 2022, San Francisco spent $5.8 billion on private contracts, over 40 percent of all city government spending, while the entire budget of Houston, a city 2.5 times as large, was only $5.7 billion. It is a strange form of socialism that runs more than two-fifths of its government through private contractors, instead of using publicly owned developers and social housing.

Ireland’s article looks at cities. But the Federal government also props up nonprofits.

I wish that our culture would do away with the intention heuristic. Our legal system should not give any special privileges to organizations that declare themselves to be nonprofit. Universities and hospitals should not be gobbling up all of the land in cities like Pittsburgh and St. Louis. For tax purposes, they should be treated as profit-seeking enterprises.